An Assessment of Corporate Governance Reforms in Italy Based on a Comparative Analysis of Earnings Management

We argue that the effectiveness of corporate governance can best be assessed with reference to its ability to provide a positive outcome with respect to choices made by management or controlling shareholders. We use the curtailment of earnings management as a desirable and measurable outcome of good corporate governance to assess Italy’s progress since the 1990s. We use the UK as a reference point since it is an EU economy of comparable size and there is evidence that its firms managed earnings to a much lesser extent than their counterparts in Italy in the 1990s. We use a matched sample of UK and Italian firms for our empirical analysis. We find that in contrast to the situation in the 1990s firms in Italy do not manage earnings to a greater extent than their UK counterparts. In addition, firm-level governance has a greater effect on earnings management in Italy than in the UK. We attribute this to firm-level governance compensating for deficiencies in national institutions (Doidge et al., 2007). The restriction of earnings management is just one positive consequence of good governance. Other positive outcomes require to be studied to form a complete picture of the impact of governance reforms in Italy. This paper is the first to use an outcome driven approach to evaluate the impact of governance reforms